Future Ventures IPO – DO NOT INVEST

Kishore Biyani wants to have your cake and eat it too. But if you love your money, you shouldn’t oblige him this time. This IPO is a piece of trash, avoid it. My main reason for saying this is – I don’t get the reason why this company should exist.

A bit about the business- FVL is like a PE fund, it invests in other companies, where it takes any kind of stake, even single digit. It has majority in a few companies. So far, it has invested Rs 820 crore or so of capital, now it wants to raise Rs 750 crore more. That makes it a very large PE fund. The difference from a fund is that there are no LPs, the standard 2:20 kind of commercial terms of the PE business dont apply, so issue managers can say that dont value this company as a % of AUM.

Some specific objections abt the issue:

They seem to be stretching their definition of business: They say they will invest in plays on consumption spends. But they also want to set up food parks. Now that is an infra play. Hard to see how that is a consumption play. By that logic u can build roads. They also want to invest in education. Umm..? Just where does the definition of consumption spends end for Future group. Next they will invest in hospitals or two wheelers. Sure education and health are part of PFCE, but then PFCE is 65% of GDP. One group certainly need not try to make a play in the entire lot (tho Tatas, Mahindras etc certainly do that)

Related Party Agreements: There is some seriously objectionable stuff here. The company has agreements with other Future group companies, which get paid for various services.

For ex, Future Capital is to get upto 1% of Adjusted Networth for providing provide services like — research service and recommendations regarding Treasury Assets; support resource mobilization in any of its investee companies; advise on mergers and acquisitions; advice on suitable and efficient exits to be made by the Company from the investee companies and provide progress reports…

Similarly, there is a Mentoring Agreement with Pantaloon Retail. which can also get upto 1%. There is Master License Agreement with Future Ideas.. WHAT ROT

No cap on expenses: In a PE fund, there is a cap on expenses – 2%. Here there is none. More than 2% can go to group companies. And the company itself can run up other expenses. If this a fund, then shouldnt there be a cap on expenses?

Minority stakes are no good: How should an investor value the several minority stakes the company has? For ex, 17% in Biba. The comany has buyback clauses for many of its minority investments, which say either an IPO in certain time frame, or buyback. But many of these companies are too small for IPOs. and they wont be able to buyback either. Then what? In investments like ACK, there is no buyback clause

Poor disclosure: The RHP says the company has exited 3 investments. Why? and at what price? No disclosure of whether they made a loss, which they must have. Poor, dont know how SEBI let it through. What seems like another bad error–

At one point, the RHP says: In terms of the SHA, In terms of the SHA, ITCPL is required to undertake an IPO within a period of 18 months from December1, 2008. Both SSA and SHA would automatically terminate on the listing of shares of ITCPL. For the purposes of IPO, the Company will not be regarded as a promoter of ITCPL.Both SSA and SHA would automatically terminate on the listing of shares of ITCPL.

18 months ended in May 2010.

High Valuations paid: They seem to have paid too much for some of their investments. For ex, they have a small stake in ACK Media, and they have invested at around Rs 100 crore valuation. Thats too much for ACK, which has abt Rs 10 crore of sales. 10x sales..